History, Technology — and Hybrids are on the side of a recovering metal market

Your average family sedan contains (or, more correctly, contained) up to thirty-nine minerals. That count was done in 2008 by the National Research Council in Washington — and that did not include all the exotic metals introduced into more recent hybrids. Copper, gallium, tin (for solders), titanium, zinc, antimony, and nickel are all riding on those four wheels. So, with each car taking large (iron ore or aluminium) or small (graphite and chromite) quantities of metals, any upward tick in production can put some colour back in commodity cheeks.

Hybrid and electric cars need rare earths; they need graphite and lithium for lithium-ion batteries. Then there are iPhones and iPads. In the next 10 to 20 years there will be developments of which we have not yet even dreamed. I mean, really, we pour over the latest gold price, the latest copper forecast; we wonder just how much flake graphite will be needed, we ponder whether China can maintain its control of rare earth supplies, we fret about whether uranium will ever again see $70/lb, we anguish about the fact that potash is still languishing at about $300/tonne. As William Goldman famously wrote in his 1983 book about Hollywood, Adventures in the Screen Trade, “nobody knows anything”. His point was that no one could predict what would succeed on the screen, but for all the millions of words pouring out from analysts, the same applies. What analyst in 1998, to pick a date, predicted any of the technology now on sale in 2014? Show me an analyst’s paper even, say in 2009, that laid out how 3D printing would develop.

You have to look at the trend — and that trend is the friend of just about every mineral commodity. No, make that all mineral commodities.

Automobiles are only one piece of the minerals picture. Consider this statement: ‘The next twenty years appear likely to be quite different from the resource-related shocks that have periodically erupted in history.’

Thus spake the McKinsey Global Institute. When you take their prediction that the rise in steel demand between 2010 and 2030 will be 80%, then perhaps they may have a point. There will be three billion more middle class consumers by 2030; since 2001, commodity prices in real terms have increased by 147%; at least $1 trillion — each year — needs to be invested in the resources system to meet future resource demands. McKinsey argued that, during the twentieth century, the prices of natural energy, food, water and materials such as steel all fell, supporting economic growth in the process. McKinsey’s commodity price index fell by almost half in real terms over the span of the twentieth century.

This steel outlook portends well for a number of commodities — metals such as molybdenum, manganese and niobium that go into various steel products, and metallurgical coal for the blast furnaces (not to mention pig iron which is used to absorb impurities in those furnaces) — but none more so that iron ore.

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The twentieth century was quite astonishing: the global population quadrupled in the 100 years from 1901, and global economic output expanded twenty-fold. Even more marked is what happened to the demand for resources. According to McKinsey’s calculations, demand soared over the 100 years by between 600% and 2,000%.

Can we do this again to meet the challenges of the 21st century? Probably, but it will not be easy (and I would rate it no stronger than ‘possibly’ — this is on the grounds that it will become increasingly harder to find minerals).

But such extraordinary growth is going to place enormous strains on metal supply. Where is all that copper going to come from? Can laterite ores pick up the baton so far as higher nickel supply is concerned? Tin is already in deficit. If, as the report predicts, calorie intake in India rises by 20%, that probably entails enormous demand for tinplate in food and beverage cans. Fortunately, on the graphite, potash and phosphate fronts, new resources are being proved up; so we can probably not worry about a crisis in those commodities for the next 20 to 30 years.

(It is important to distinguish between immediate situations and the long term. As this is written, copper prices have been affected by talk of a looming surplus. That takes in 2013 and 2014. By contrast, 2025 or 2035 is quite another kettle of fish.)

According to McKinsey, China could every year add floor space totalling 2.5 times the entire residential and commercial square footage of Chicago, and India could add floor space equivalent to Chicago’s annually. Where is the zircon going to come from for the tiles and wash basins? What about all that copper wiring? How much stainless steel, and therefore nickel, will all this require? (Or not — Nippon Steel has now produced a new stainless steel which contains no nickel. See how quickly things change in this business?)

Those buildings will all need steel containing manganese and niobium as well as iron ore. The digital electronics will need everything from tantalum to rare earths. Medical equipment will swallow more silver for the metal’s anti-bacterial properties. In 2012 technology media was humming with the news IBM had developed new solar cells. Instead of using scarcer (and more expensive) metals like indium and gallium, the IBM breakthrough allowed the use of more readily available copper, zinc, tin and selenium. IBM thinks the cheaper cells could make it possible for this solar technology to be used more widely, and is projecting something like a five-fold increase of the power output achieved around the world from these solar cells.

From Japan came news in mid-May 2012 that Mitsui Mining & Smelting revealing was, due to the growing demand in China for aluminium to make beverage cans, setting up a plant in Jiangsu province to make filters that remove impurities during the aluminium smelter process. And, at the same time, Japan’s JGC Corp said it was going to produce liquid fuel oil for power plants made from low grade coal in Indonesia. The end product will cost at least thirty per cent less than oil-based fuels and would provide a new use for the otherwise unattractive low grade coals. It would also help Japan as it relies more on thermal power following the Fukushima nuclear crisis.

McKinsey portrays the future as an exciting challenge. I, however, think it is a very frightening one — and one that will include conflicts over what resources are left. But probably the Chinese have already figured that out, and by 2030 will own pretty much everything, anyway, by selectively picking off those deposits that matter.

Comments

GoBucks

Hi,

As for nickel in stainless steels…a number of ferritic and martensitic grades, bearing little or no nickel, have been around since the 1970s. And yes, manganese can be used as a substitute for nickel. None of that is new.
But none of those are “drop-in” replacements for the 300-series austenitic stainless grades (which generally run 7 to 11% nickel content). There are differences in fabrication characteristics and corrosion resistance.
I’ve watched these developments since my college days 35 years back. Despite the advancements described above, the austenitic grades are still “king” for a lot of commercial and residential applications.
Demand for nickel is here to stay.

Good stuff Robin but more pertinently where do Basic Materials, industrial inputs, sit in the current business cycle?
QE has spun the wheels for the Fins while GDP has struggled for traction but will the market now turn to sectors that make real things?
If the traditional cycle holds we’re about due: http://cdn-3.stocks-for-beginners.com/image-files/stock-market-performance.jpg
Perhaps some early indicators emerging IMO.